Prologis Inc (PLD) 2019 Q3 法說會逐字稿

Welcome to the Prologis Q3 Earnings Conference Call.

My name is Michelle, and I will be your operator for today's call.

(Operator Instructions) Also note that this conference is being recorded.

I would now like to turn the call over to Tracy Ward.

Tracy, you may begin.

Thank you, Michelle.

Good morning, everyone.

Welcome to the Prologis Third Quarter Earnings Call.

If you've not yet downloaded the press release, it's available on our website at prologis.com under Investor Relations.

This morning, you'll hear from Tom Olinger, our Chief Financial Officer; and also joining us for the call is Hamid Moghadam, Gary Anderson, Chris Caton, Mike Curless, Ed Nekritz, Colleen McKeown and Gene Reilly.

Before we begin our prepared remarks, I'd like to state that this conference call will contain forward-looking statements under federal securities laws.

These statements are based on current expectations, estimates and projections about the market and the industry in which the company operates as well as the beliefs and assumptions of management.

Both of these factors are referred to in Prologis' 10-K or SEC filings.

Additional factors that could cause actual results to differ materially include, but are not limited to, the expected timing and likelihood of the completion of the transaction with IPT, including their ability to obtain the requisite approval of their stockholders and the risks that conditions to the closing of the transaction may not be satisfied.

Forward-looking statements are not guarantees of performance and actual operating results may differ.

Finally, this call will contain financial measures such as FFO, EBITDA that are non-GAAP measures and in accordance with Reg G, we have provided a reconciliation to those measures in our earnings package.

With that, I'll turn the call over to Tom, and Tom, will you please begin?

Thanks, Tracy.

Good morning, everyone, and thank you for joining our call today.

We had another outstanding quarter.

Customer sentiment remains positive, and we see no meaningful impact on our business from uncertainties surrounding trade.

Our proprietary operating metrics reflect healthy demand, showing deal gestation, conversion rates are positive and in line with last quarter as our customers improve their supply chains in response to consumer demand for ever-faster delivery times.

U.S. market fundamentals are strong.

I'd like to share our assessment of third quarter market statistics as we've seen more divergent viewpoints than normal.

We see historically low vacancy in the mid 4s with supply and demand balanced at 75 million square feet each.

Rents have outperformed and as a result, we are raising our 2019 U.S. rent growth forecast from 6% to 7%, leading to an 80 basis point increase in our global rent forecast to 6.5%.

Activity across Europe remains healthy.

In the U.K., while overall demand is solid and our build-to-suit pipeline is very active, we are highlighting the Midlands as a supply risk.

We continue to forecast 2019 rent growth on the Continent to be the highest in more than a decade.

Fundamentals in Japan are improving, with vacancy in Tokyo at less than 3% and Osaka at less than 6%, the lowest points in 5 years.

From an operating standpoint, you will see that our quarterly results reflect our strategy of prioritizing rents over occupancy to maximize long-term lease economics.

We leased 38 million square feet, including nearly 6 million square feet in our development portfolio.

Quarter-end occupancy was 96.5%, down 30 basis points sequentially and remains above our 5-year average.

Rent change on roll for the quarter hit an all-time high of 37%, led by the U.S. at 41.7%.

Our share of cash same-store NOI growth was 4.3% for the quarter, which was impacted by a 60 basis point reduction in average occupancy, again, consistent with our strategy to push rents.

Globally, our in place to market rents spread widen by 40 basis points in the quarter and is now almost 15.5% or over $400 million in nominal terms.

Core FFO was $0.97 per share for the third quarter, which included $0.18 of net promote income from our PELF venture.

The promote came in above our forecast as Europe valuations increased more than 2% in the third quarter.

For deployment, starts in the quarter were $577 million, with an estimated margin of 22% and included about 2/3 build-to-suits.

The pace of starts will increase significantly in the fourth quarter.

Stabilizations were $658 million, with an estimated margin of 37% and value creation of over $242 million.

We continue to access capital globally at very attractive terms.

During the quarter, we issued $2.8 billion of debt, primarily in euro at a weighted average fixed interest rate of under 1% and a weighted average term of more than 14 years.

It's worth pointing out that we have an annual need for an incremental $600 million of non-dollar debt to naturally hedge our growing international assets.

These issuances lowered our total weighted average interest rate by 10 basis points to 2.4% and lengthened our weighted average maturity by about 2 years to just under 8 years.

We continue to maintain significant investment capacity on the balance sheet with $11.7 billion of liquidity and potential fund sell downs.

In addition, there is an incremental $5.4 billion of existing third-party investment capacity in our ventures today.

Guidance for 2020, which I know many of you are looking for, will be provided at our upcoming investment forum on November 5. For 2019 guidance, I'll cover the highlights and then our share basis, and note this guidance does not include the positive impact of the IPT acquisition.

We're increasing the bottom end of our cash same-store NOI guidance by 25 basis points and now expect a range of 4.75% to 5%.

We are raising the midpoint for development starts by $250 million and now expect starts to range between $2.2 billion and $2.5 billion.

Build-to-suits will comprise more than 40% of total starts, which is above our initial expectations.

We are projecting $650 million of net deployment uses, which we've planned to fund with free cash flow and debt.

Net promote income for the full year is now expected to be $0.18 per share, an increase of $0.02 from our prior guidance.

For the full year, we're increasing our 2019 core FFO guidance midpoint by $0.03 and narrowing the range to between $3.30 and $3.32 per share.

At our revised midpoint, growth in core FFO per share, excluding promotes, is 10% higher than last year.

Over the past 5 years, our growth has clearly been exceptional with a CAGR of almost 12%, while delevering from 27% to 18%.

As I mentioned, this guidance excludes the acquisition of IPT, which we expect to close in January of 2020.

We plan to split the $4 billion portfolio equally between our 2 U.S. vehicles.

Private capital investor interest continues to be robust as evidenced by the record fundraising in our ventures in the third quarter.

Our pro rata investment will be approximately $1.3 billion, which we will fund with cash and debt.

We continue to expect the annual core FFO accretion from IPT to range between $0.05 and $0.06 per share or roughly 2% on a stabilized basis.

The acquisition of this high-quality portfolio will capture significant revenue and cost synergies and deliver shareholder value on day 1.

To sum up, the third quarter was a continuation of what has already been an excellent year.

I feel great about our outlook for the rest of the year and beyond.

And with that, I'll turn it to Michelle for your questions.

(Operator Instructions) Your first question comes from Craig Mailman from KeyBanc Capital Markets.

Maybe just wanted to hit here on demand and kind of where you guys have the availability in the portfolio.

Could you guys just kind of talk through what you're seeing in the demand profile between kind of larger and smaller tenants and your ability to push rents there and maybe improve credit quality?

And then kind of talk a little bit about what you guys see as your ability to push the occupancy in under 100,000 or under 250,000 square-foot space where you have more opportunity?

And maybe talk -- is there any more frictional vacancy in those type of spaces than in your bigger box?

Or could we see those kind of spaces kind of narrow to where your average occupancy could be?

Now that's some question.

Yes, I know.

Did everybody write down -- anybody write down?

Well, let me take a stab at this, first maybe talking about the smaller spaces.

So these are spaces where we can push rents, and we're seeing pretty broad-based demand, frankly, across all sectors.

But I think those are the smaller segment is where we can push rent growth.

And I think if you look inside our rent change numbers, which are obviously at all-time highs, that would be the highest.

In terms of the composition of demand from an industry perspective, again, that is pretty broad-based.

Obviously, auto is weak almost -- no matter where you are in the globe but otherwise, we're still seeing pretty broad-based growth.

We're seeing continued growth from the e-commerce sector, and that's probably a combination of reconfiguration of the supply chain as well as net demand.

So that's a start on it.

And Craig, this is Tom.

So 2 of your questions.

One on credit quality.

Our credit quality continues to be exceptional.

Our bad debt experience has been below 20% -- or 20 basis points of rent -- below 20 basis points of rent for the last 6 years, continues this quarter.

So I feel great about our credit quality.

And then just regarding your question on small spaces and frictional vacancy, we do have many more units in our smaller spaces.

So naturally, there's going to be more churn in that particularly, as Gene pointed out, we're pushing rents.

So you could see a high -- a little higher frictional vacancy, but the payoff is much higher rents.

So the economics are clear to keep pushing rents.

Your next question will come from Jeremy Metz from BMO.

Hamid, FedEx on its earnings call last month, they had it -- they were citing more challenges ahead in 2020.

They talked about the typical, the global trade disputes and concerns over economic slowing having created significant uncertainties.

In your opening remarks, Tom did mention that you hadn't started -- you hadn't started to see that in your customer behavior yet, but clearly those risks are out there.

So just wondering, has that surprised you at all that you really haven't seen it in the customer behavior yet?

And then maybe just any broader thoughts on how this all impacts your outlook for development starts beyond the, call it $2.3 billion you have underway in terms of cadence or desire to take on spec, et cetera?

Sure.

I think both statements can be true at the same time.

FedEx cares more about flows and obviously, those become very volatile when it's trade wars one day and no trade wars the next day.

And they have a very fixed cost basis infrastructure, planes and trucks and all that.

So erratic volume cannot be good for them because they either miss the peaks or can't handle -- either they can't handle the peaks or have too much capacity for their trucks.

We are in the stock business.

So actually uncertainty in the short term is extra demand for our space because when you don't know when that next good is going to get to you because of tariffs or at what cost, you're going to carry more inventory and more stock closer to the customers.

So I think FedEx is right as far as the metrics for their business are concerned.

And I think the metrics for our business are just different.

Next question will come Derek Johnston from Deutsche Bank.

Can you discuss the leasing process for the multi-story facility in Seattle where Amazon and Target ultimately signed?

And how competitive was this bidding process?

How many interested parties did you have?

And where did rents shake out versus underwriting?

And what type of future demand do you anticipate?

I would say the rents and the economics turned out better than our expectations.

It took a little bit longer to lease up, but it leased up at higher rents.

And the reason it took a bit longer to lease up is that nobody ever seen a multi-story building before so they wanted to look at it, layout a lot of different configurations and make sure they could get the efficiencies out of it.

So we couldn't be more pleased with the quality of the tenants or the financial performance of the asset.

With respect to its implications, look, I -- for some reason, this building has gotten a lot of attention, and people think that there is a multi-story strategy.

There is no multi-story strategy.

The strategy is to provide space at places where our customers want them, which is increasingly close to their ultimate customers.

The solution in some places is multi-story and in other places is single story.

So we're not in the business of building so many multi-story buildings.

We're in the business of growing our infill position.

You're next question will come from Vikram Malhotra from Morgan Stanley.

So Blackstone just sold a part of their original GLP acquisition.

Wondering if you looked at that portfolio and if you can just more broadly give us any sense of any portfolios across regions and sort of how pricing or cap rates are shaking out?

Vikram, you can assume that we look at everything.

People know our phone number, and they know we're -- what business we're in.

So we absolutely positively have never thought of it, a material transaction that we haven't seen.

So you can assume we look at everything.

I think the implications are, you're going to have to ask Blackstone, but obviously they bought that portfolio and presumably they paid a pretty good price to get it and presumably, they sold it to those guys who must have presumably paid a really good price to get it that was attractive enough for Blackstone to sell it.

So I can't be any more specific than that because I'm not in Blackstone's decision-making rooms, but those would be -- those assumptions would be probably pretty fair.

Your next question comes from Jamie Feldman, Bank of America Merrill Lynch.

I want to get your -- more of your thoughts on just the supply outlook.

I mean we do have historically high supply coming online, but you just said your development starts were 63% pre-leased in the quarter and you want to start more, you expect a pickup in the fourth quarter.

So can you kind of paint the big picture of how we should be thinking about the supply risk heading into '20?

And as you think about your [new] development opportunities, the pre-leased percentage and what gives the comfort at these -- this level of volume?

Jamie, Hamid here.

I think there's a lot of confusion about supply numbers.

People mix supply, which is an annual concept, with what's under construction, which is a snapshot at a given point in time.

So let me have Chris take you through those numbers because they're materially different as construction duration has lengthened.

Yes, absolutely.

Jamie, let's talk about 3 concepts.

First completion.

Completion is actually to be down this year by about 8%.

When we look at a more real-time indicator, like starts, starts are flat this year.

Now as Hamid mentioned, duration to build projects has gone up.

And so we've seen under construction rise.

The time to deliver products have gone up about 1/3 in the cycle for all the challenges around supply that we previously discussed.

And so deliveries out of that pipeline now or much less than kind of 100% in a given following 4 quarters.

So you got to look at the time to deliver product to understand what deliveries will be in the following 4 quarters.

So basically if you had the same level of supply, same level of property under construction, you would have 2/3 the annual supply, if the trends of the recent past continue.

So those 2 concepts need to be really kept apart.

Your next question comes from Blaine Heck from Wells Fargo.

Hamid, in the press release, you pointed out the exceptional interest that you're seeing for your strategic capital ventures, and you guys have obviously done a great job raising money on that side of the business.

Can you just talk about whether there are any specific groups that you're seeing incremental interest from?

And then on the flip side, what do you think could cause that investor interest to decrease?

I guess is there anything that kind of sticks out to you as a threat to that capital source, in particular?

Yes.

The sources are pretty much from everywhere.

I would say the U.S. pension funds are probably flat to down compared to their, call it 10-year type numbers.

But Japan is up significantly -- generally Asia is up significantly as these large institutions and sort of the pension system gets active on alternative investments.

So it's everywhere.

On the margin, I would say, U.S. a little less and Asia a little bit more.

With respect to the threats to that, it's the same old threat we've seen in every cycle.

It's the denominator effect.

If these guys are generally at today's investment levels, under-allocated to real estate and alternatives generally and really under-allocated to industrial because it's a tough property type to access.

But if the stock market goes down and the bond market goes down and the rest of the portfolio goes down, there -- the same percentage allocation to real estate will have to go down, and that's usually been the cause of reductions in capital flows.

Your next question is from Ki Bin Kim from SunTrust.

Just 2 questions.

Hamid, what's your view on the potential impact from growth in e-commerce on the warehouse business and how PLD would potentially play a part?

And second just on lease spreads, obviously, some really good numbers.

Anything interesting about the mix of what rolled this quarter that might be different going forward?

Yes.

I'll let Tom answer the second part.

I think there are 3 things that drive the share of e-commerce in our portfolio or the space devoted to it.

Number one is penetration -- increasing penetration of e-commerce as a percentage of total sales, retail sales.

That number has gone up every year and I think will go up for the foreseeable future as more categories become e-commerce friendly and as the millennials -- I guess they're not millennials, the Generation Z-ers who grew up with an iPhone, start entering their prime shopping years.

So the iPhone, I think is 11 years old.

And 12-year-olds who are now graduating from college or 11 years old who are graduating from college basically have never known a world without an iPhone and e-commerce.

So I think as those guys enter the population, the spending part of the population, I think the percentage will go up.

And then there's the old 3x factor of space that e-commerce takes, which, well, on top of the gaining share of e-commerce and underlying retail growth, which is probably the slowest of the 3 factors, maybe 2% type thing, all those 3 factors combined should make for a really good environment for e-commerce demand over time.

Now I don't -- the real strategic question is how does automation affect the 3x factor?

Does it reduce it?

Does it expand it?

The answer on that it is unclear at the moment.

And in certain instances, it increases the need for real estate and in certain cases, it reduces the need for real estate but one area that for sure over time will get more efficient is the returns business.

And returns are really caused by free shipping and free returns and all that sort of thing.

And over time, I think fit and issues like that will get better.

So I would guess that part of the demand in warehouse space will go down.

Anyway, the biggest, biggest strategic driver of all this, long-term secular driver of all this is the need for speed and choice.

Because the more choices you want and the quicker you want them, the more inventory you need to position near the customer.

So that's all really good for our business.

Ki Bin, this is Tom on your question about rent change for the quarter.

We did see higher mix this quarter in the West and East regions of the coastal markets of the U.S. That being said, almost every region had its all-time high or near its all-time high in rent change.

So we're seeing very positive rent change across the board, almost without exception.

You ask about a trend, our 4-quarter trailing average rent change is right at 28% this quarter.

I think that's a pretty good outlook in the near term for where rent change should be.

But remember when we talk about in place to market at being 15.5% below market, that means rents need to grow 18.3% to get to market, right.

So if you're 15% -- 15.5% under rent than you need to grow by 18.3%, that's just math to get to market rents.

So think about our in-place built-in rent change at being 18.3% and think about what's rolling near term as obviously signed further ago.

So naturally, our rent change would be higher in the near term.

And the last thing I'd point out is rate change.

The rent change on roll, that 4-quarter average went out 28%, that's up 600 basis points in the last year.

So we've seen that number move up meaningfully, and I think we can hang around there, based on our in-place market.

Next question comes from Eric Frankel from Green Street Advisors.

Just 2 quick questions.

One is related to portfolio sales, just based on the aforementioned Blackstone activity.

Do you see any meaningful differences between portfolio sale prices versus smaller transactions you guys might pursue?

And then second, just on the demand front.

Obviously, there's a lot of press kind of given to smaller buildings and multitenant leasing.

My conclusion is that that kind of leasing and the rent growth you can get is really more dependent on locations and property size.

Can you affirm whether that's true or not?

Or is a smaller building in some Midwest market getting record rent growth as well?

Eric, let me jump in the middle of that before Gene starts on the first part.

The most important thing with respect to rent growth is location in terms of macro market and the micro submarket, by far, more important than tenant size and all the stuff we talked about before.

So you're spot on that one and those are scarcest properties.

Gene, you want to answer rent growth?

Yes.

Eric, with respect to the portfolios, I mean we -- as Hamid mentioned, of course, we look at all of these things.

We price them.

And for sure, lately, portfolios are selling at a -- what we'd consider a premium to the sum of the parts.

So I think that is true.

Having said that, there's also plenty of one-off transactions in very, very good markets that have pretty stunning metrics associated with them.

Your next question comes from Caitlin Burrows from Goldman Sachs.

I was just wondering maybe on the development side, the total development portfolio declined slightly since last quarter but the 2019 starts are actually up.

So is this just a function of pulling forward previously expected activity?

And what's your confidence of being able to sustain that level of starts going forward as Prologis growth?

And then just on the yield side, those have come in a little, I think from about 6.5% to 6.1%.

So what's driving this?

And could that increase back up?

Yes.

On the second point, that's really basically mix.

But having said that, you have generally seen cap rates declining, frankly over the last -- well, for 20 years.

But over the last couple years, cap rates have been declining, and you will see some change in the returns on costs as well.

In terms of development volumes, what we're implying is a big fourth quarter, about $1.2 billion, but I think that's about right on top of what we did in the fourth quarter of last year.

We're highly confident of that.

And in terms of the future beyond that, we'll talk about that when we give guidance in the future.

Yes.

And it just reminds me of a previous question that I don't think I answered, which is what's our attitude towards spec development?

And I would say the bar on spec development has been high and continues to be pretty high, and you can see the results of that in the build-to-suit percentage being a lot higher.

Your next question comes from Manny Korchman from Citi.

Tom, just thinking about your year-end occupancy guidance, your retention in the quarter was actually higher than the trailing few, and yet you commented in the press release that you're focusing on rent growth versus occupancy.

So does that mean that new leases aren't happening as fast as you thought, and is that because of rent levels?

Or is there something else that's sort of not connecting between retention rates and occupancy?

So this is not Tom, but I'll answer your question.

The retention ratio -- you're dealing with tenants that are in the space and today, labor is a huge issue for people.

And every time they move, they have to go hire bunch of people because now the workers have choice and they're not going to change their commuting patterns, et cetera, et cetera.

So customers that are in an existing space have a much higher propensity to stay regardless of almost rent, which is an afterthought for a lot of them.

So where you see the effect -- the primary effect of pushing rents is on capture of new leasing in the developments.

That's where you're likely to see it the most and that of course, doesn't affect the retention numbers that we report.

You're next question will come from Nick Yulico from Scotiabank.

I just had a question on the leasing spreads.

I know, Tom, you gave some info on what drove it higher this quarter.

I just wanted to make sure as well though that the switch to the Clear Leases in the past year, does that have any impact on the way you guys measure the releasing spread?

No impact at all.

Your next question will come from Michael Carroll from RBC Capital Markets.

Yes, I just wanted to follow up on the, I guess PLD's stance on pushing rents over occupancy.

Haven't -- hasn't this been your stance over the past few years?

Are you just being more aggressive today?

And is that a good fair way to say is what's been reflected in the lease spread and how they're pretty much double than what they were for the trailing 4 quarters?

It's been our sales objective to do this for previous quarters but there are these messy things called human being and people, the field tests that have been -- need to change their mindset, and that took a couple of years to really get that going.

We track why we lose tenants when we don't renew somebody, and we track for a long, long time.

And I'm not kidding you, but there were years that we have actually 0 tenants leaving because of rent on renewals, literally.

So that number is no longer 0, but it's a lot lower than I think it should be or I would have expected it to be.

Your next question comes from Steve Sakwa from Evercore.

Hamid, I just wanted to clarify, when you talked about the -- you and Chris talked about sort of the construction pipeline or time to build getting longer, was that 9 months to 12 months?

Or was that more of a 12 months to now 16 months?

Just trying to understand that.

And then are there any markets in the U.S., you didn't really call anything out, but just trying to get a sense, are there markets in the U.S. that you're a bit more worried about or really just seeing much less rent growth today?

Yes.

By the way, on the duration of the construction, it depends on where.

In Japan, they will be -- they were 16 months, and I don't know what they are today but takes longer to build a multi-story building.

But let's focus just on a single story U.S. style warehouse, and Chris has the numbers for you.

Yes, Steve, it's going from 8 to 9 months to something more than a year, call it 13, 14 months.

What I think we will see is that deliveries over the next 4 quarters can be roughly 75% of the under-construction pipeline.

That's how we see the numbers coming together.

As it relates to markets, we talked about how we -- on the last call, how we haven't added any markets to our supply risk list.

That remains the case today and in fact, market like Chicago comes off that list this quarter.

So...

Yes.

And Osaka came off a little bit earlier, so.

Yes.

Osaka is a market that came off and then on that list included Atlanta, Pennsylvania, Houston, Spain and the Midlands was covered in Tom's script.

I would say the one that I would point out as being more at risk today than last quarter, even though it was on the list is Houston, there is a lot of space under construction in Houston.

And I think some people are going to get surprised, now -- and some of it is not in the best sub markets.

So some of the outlying submarkets in Houston you need to watch.

Fortunately, we're not exposed to those submarkets.

Your next question will come from John Guinee from Stifel.

Great.

I think Mike Curless is in the room.

I was just looking at Page 24, and I noticed an uptick and a pretty sizable land acquisition year-to-date and also acquisitions and other investments in real estate.

Can you walk through, Mike, where you're buying the dirt?

And also what the other investments in real estate might be?

Probably Gene should answer that question since Mike has a new job, but Gene go ahead.

Yes, Mike, maybe offer customer color [within there] but, John, where we generally need to replace dirt is in the coastal markets where we've done a lot of development, absorbed a lot of the land bank.

So there's a piece in L.A. included in that.

But as we look out going forward, replacing land is very, very expensive these days.

As you know, we've done a lot of work to work this land back down to what we considered a manageable level.

As we replace land going forward, we're trying to do it creatively, we're trying to tie up land through auctions, but it's going to be more expensive.

And we'll see the land bank pick up a little bit, but we're going to remain very disciplined on that front, as we have been.

Our biggest needs for land I would say are Southern -- we're good in Seattle, we're good in the Bay Area.

Southern California, we need more land.

Chicago, we need more land.

And I would say New Jersey, we need more land for sure.

Those are the top 3 that I would call.

And with respect to the customers and where they want to be 2, 3 years ago, 80% of our land that we're doing build-to-suits and we're in global markets where the numbers are closer to 95% these days.

And John, your question about the other investments, just think about those as being covered land plays.

Not land, but will become land soon.

Yes.

Those are actually yielding, probably pretty close to the local market cap rate.

Maybe a tad below, maybe 20, 25 basis points (inaudible) land plays.

Your next question comes from Michael Mueller from JP Morgan.

I was wondering, do you expect the elevated mix of build-to-suits to be a little more than normal over the next year or so?

This is Mike Curless.

We did have a robust quarter at almost 2/3 build-to-suits.

If you look across the year at blending in, in the high-30s and I'd expect numbers to be in the low-40s as we look forward.

I think this was an unusually high quarter, but directionally indicative of how important build-to-suit part of the business is to us these days.

Compared to 5 or 10 years ago or 15 years ago, I mean that number would've been 20%, 25%.

So I think the tightness of the markets is forcing the build-to-suit percentage up.

And your next question will come from Craig Mailman from KeyBanc Capital Markets.

Just wanted to kind of hit on kind of your liquidity here and the funds and on balance sheet.

Your cost of capital is clearly advantageous but you have a lot of kind of well-heeled competitors as well.

I'm just kind of curious, you guys look at the acquisition landscape, you've been successful in some, missed some others.

But just kind of how you look at return requirements for on-balance-sheet acquisitions here versus the in funds?

And just talk a little bit about what you're seeing on the quality spectrum of portfolios that have traded or may be out there and kind of interest level?

Let me start that and Gene jump in, if you'd like.

I think the quality -- the pricing for quality differences is getting compressed.

In other words, cap rates for lower quality, lower growth assets are compressing against high-quality assets and locations.

And that always happens in this part of the cycle.

People are really anxious to get into this asset class.

And if it's industrial, it's industrial and they become less discriminating over the time.

Also if you're a leveraged buyer and you're really looking at locking in the cost of capital -- debt capital today and you employ a lot of it, obviously this is a really good environment for your buying things and financing them.

With respect to the way we look at our unleveraged WACC, our cost of capital, I would say we look at that every quarter or so.

And we occasionally and only in a very limited way have dropped our requirements.

I would say for a U.S. high-quality portfolio, probably a 6 IRR would be the right number today, very high-quality portfolio for us and take it up from there.

But unfortunately some stuff in the marketplace, even for low-quality assets is getting priced too tighter than that.

Now a 6 IRR in a 1.6% or 1.7% 10-year environment is pretty attractive.

I mean those are some of the widest spread I've seen in my career.

And so yes, the absolute numbers sound low but in relation to cost of capital or debt cost of capital, they're actually pretty attractive.

Your next question comes from Vikram Malhotra with Morgan Stanley.

Just wanted to follow up on 2 things.

One for Chris.

You mentioned sort of some of the rent growth and obviously, it's different by submarkets.

I'm wondering if you're starting to see any divergence from recent trends within submarkets, within MSAs, meaning more divergence than what you've seen recently?

And then just one for Tom.

On the Clear Leases, wondering how that's -- if any impact on the expense side?

And if it may be positively or negatively impacting NOI growth?

As it relates to rent growth, a couple of ways to look at that.

One is we continue to see that divergence between infill and non-infill, as Hamid was discussing earlier in terms of submarket strategy.

As it relates to markets, we've seen better outperformance in the East, in New York and in Toronto, for example, and we've continued to see really good growth in Europe, much like we telegraphed last year and the year before.

And what you see there is some of the early recovery markets continuing to outperform, whether that's Germany or the Netherlands or Czech Republic, and some late recovery markets really starting to pop rents comes to mind.

So that's how the rents are trending.

Great.

Vikram, on your question around the Clear Leases and expenses, those leases are set up where we fix all the costs but real estate taxes, the tenant bears that.

And we are collecting slightly more on the expense reimbursements right now.

But we're -- essentially call it even, so we set it up that way to be expense neutral, so no impact on NOI.

And to go back to Nick's question just on the Clear Lease and did that have any impact on how we're calculating rent change, it does not.

That Clear Lease, just think about it simply having a rent component and an expense reimbursement component.

And the rent change is calculated on the revenue, the rent component, not the expense component.

So no impact.

Yes.

I just want to clarify something Tom said.

We actually don't collect reimbursements, that's why it's a Clear Lease.

But we do track what it would've been under a triple net lease.

And actually for the last 1.5 years or 2 that we've been implementing this, the numbers have been remarkably on top of one another, and that's the advantage of having, I don't know, an 800 million square foot portfolio to spread the stuff around.

And your next question will come from Manny Korchman from Citi.

So Hamid, I had a follow-up on my previous question and I have a new one for you guys.

But so you mentioned leasing or development, I guess that would impact your occupancy guidance.

So just going back to that, in isolation, if retention is where you expect it to be at 81% and you lowered your occupancy guidance, that means that your pace of lease-up in already vacated space or space to be vacated is going to be slower.

Is that the wrong read through?

We are pushing -- remember the part that I said that we -- in the years that we had 0 people that we were losing as part of that renewal discussion, that number is not 0 but it's not a high as I would like it to be.

You're also talking about occupancy declines from 98%, and I've been doing this for 37 years, there was only 1 year where we were in the 98% range and I said, "Guys, don't get used to this, we're going to push this number down." So I think we were very clear on what our strategy was, and I would say we've executed it exactly the way we described it.

Your next question comes from Jamie

Feldman from Bank of America Merrill Lynch.

I was just hoping you could explain more why developments are taking much longer to deliver?

And then also just thinking about the TI number in the quarter and what we've seen this year, I mean are you spending more on leases -- on TIs on leases?

And if so, can you explain what those -- why that's happening and what that's going to?

And is that impacting your ability to push rents as well?

Jamie, I'll take the first one.

It's Gene.

It's basically a combination of construction timeframe.

And there's some entitlement timeframe in that as well.

And which by the way can affect a project through its construction and as you pull secondary permits as you go forward.

So it's really those 2 items.

And of course, depending on where you are geographically, there's a pretty wide range of outcomes.

We've also had kind of weird weather patterns that I think most of you have noticed, that definitely messes with construction schedule.

Jamie, on the second question on the turnover costs, I'd -- it's a little higher this quarter.

I think it's due to 2 things.

It's mix and timing, but I'd go back and look at what our -- what we've been on a trailing 4 quarters.

I think that's a better representation.

We have been coming down pretty clearly over the last -- on a trailing 4-quarter basis over the last really 3 years, and that makes sense just given concessions are falling across-the-board.

The other thing I'd point to is look at free rent as a percent of lease value.

That is consistently declining again.

So I think overall this quarter is a mix and a little bit of timing.

It's not impacting our -- we're not trying to buy rent change, if that's the question.

And your next question comes from Steve Sakwa with Evercore.

Hamid, I was just wondering if you could provide an update on sort of the big data initiatives and the procurement and sort of where you stand?

And is there something we're likely to get a lot more detail on for 2020?

On the big data, we are, as I mentioned to you, tackling 1 very specific project, which is yield management.

And I would say that's going really well.

We're piloting in 4 markets, and we'll be expanding that to the portfolio, and we're encouraged by the early results.

I don't know, Chris may have more to say about that.

Gary, you want to talk about the other initiative?

Yes, on the procurement initiatives, we still have that procurement organizations we talked about in the past and things are going well there, I'd say both in terms of procuring construction related items and CapEx and G&A, so that is off and running.

And with respect to the revenue side of the equation, I'd say that we're off to a good start.

We're starting to build that business.

We're probably getting into the tens of millions of dollars in terms of revenue, so it is becoming more meaningful and we're seeing roughly double-digit growth.

Yes, I would say that, that business today, if you isolated it, it would be pennies a share of incremental earnings.

I think in 2 to 3 years, it will be dimes.

And we're hoping that its potential is more than $1.

So but that is going to take us a while to get to.

So don't put in the dollars, don't put in (inaudible), put in a couple of pennies that we're talking about right now.

We're doing better than that actually.

But it's a slow ramp.

Nobody's done this before so we need to educate ourselves and our customers and a lot of other people to get to that.

I think, Steve, you were the last person.

So thank you all for your interest in the company, and I want to put in a big plug for our analyst day, which is coming up, and that's why we saved all the good guidance stuff for that date to encourage you to come.

Take care.

Thank you, everyone.

This will conclude today's conference call.

You may now disconnect.